The historic bull market just celebrated its eight-year anniversary this month. For investors worried about how much upside the aging bull market has left, dividend exchange-traded funds, or ETFs, are a great, conservative way to diversify a portfolio.
Most stocks are now at or near all-time highs. It’s always risky putting all your eggs in one basket, especially if they’re expensive eggs.
Instead of banking on further upside from individual stocks, dividend ETF investors can enjoy diversified exposure to segments of the market that may still be undervalued. They are also able to use ETFs to invest in assets other than stocks and enjoy reliable yields of above 4%.
Dividends and diversification are the two D’s of responsible long-term investing. The higher stock prices rise, the more investors should shift their attention from market upside to risk management.
Here are three dividend ETFs that provide investors with both diversification and high yields.
Dividend ETFs for Diversification: Vanguard REIT ETF (VNQ)
Dividend Yield: 4.7%
Expenses: 0.12%, or $12 per $10,000 invested annually
Investing in real estate is traditionally something that has been reserved for the extremely wealthy. After all, how many properties can the average person afford to buy before he or she is tapped out?
The rise of the real estate investment trust (REIT) made real estate investing possible for a whole new class of investors. Today, all you need to invest in real estate is the $80 it takes to buy a share of the Vanguard REIT Index Fund (NYSEARCA:VNQ).
There are a number of advantages to investing in the VNQ from a risk-management perspective. First, the real estate market tends to perform very well during bull markets, yet it has a relatively low historical correlation to stocks and bonds. That loose correlation is exactly what investors should be looking for in terms of portfolio diversification.
In addition, the fund also has internal diversification as well. The fund currently contains 157 REIT holdings, limiting the risk from any particular trust.
Of course, the cherry on top for the VNQ is its generous 4.7% dividend yield. That yield is more than double the 1.9% yield of the S&P 500.
Dividend ETFs to Buy: Alerian MLP ETF (AMLP)
Dividend Yield: 7.4%
While most stock market investors have been riding the overall market’s gains, some market sectors have been left in the dust. The oil & gas industry has been pounded in recent years due to a huge global glut in oil supply. The collapse of oil prices in 2014 led to a freeze in the U.S. oil market that is just now starting to thaw.
Because of the down cycle in the oil industry, the Alerian MLP (NYSE:AMLP) has actually delivered a -25% return over the past five years. The AMLP ETF invests in master limited partnerships, which derive income from transportation and storage of oil & gas.
President Donald Trump has pledged to deregulate the oil industry and invest $10 trillion in infrastructure projects over the next decade. Both policy approaches should benefit MLPs. However, keep an eye on oil prices, which had stabilized for a while above $50 but have dropped again recently.
The AMPL’s investments are spread out over 27 different MLPs, providing investors with solid internal diversification. But perhaps the best thing about the AMLP is its amazing 7.4% yield.
Dividend ETFs to Buy: iShares iBoxx High-Yield Corporate Bond ETF (HYG)
Dividend Yield: 5.2%
The iShares iBoxx $ High Yid Corp Bond ETF (NYSE:HYG) is another investment option that has a number of distinct advantages for investors. The HYG invests in high-yield corporate bonds.
Exposure to the bond market is a great way for investors to diversify away from stocks. Typically, bonds are viewed as a much-lower-risk option than stocks, but high-yield bonds are a bit of an exception. The HYG invests in bonds that are typically referred to as “junk” bonds, but the nickname shouldn’t scare off investors.
HYG bonds are generally rated between B and BB by the major credit agencies. While they’re certainly not the safest corporate bonds out there, they represent the highest tier of the junk bond class.
Much of the risk associated with defaults is mitigated by the HYG’s diversification. The fund currently has more than 1,030 holdings, many of which yield 10% or higher. Investors are rewarded for the higher risk of junk bonds by getting paid an overall yield of 5.2%.
Because of its diversification and yield, HYG is one of the best dividend ETFs out there for long-term investors.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.